Olin Corp: A Diversified, High Dividend Stock

| About: Olin Corporation (OLN)

In searching for high dividend stocks with strong balance sheets, Olin Corp (NYSE:OLN) emerges as an interesting prospect.

Olin Corporation has two business concentrations:

  1. Winchester division - manufactures sporting and military ammunition, and industrial cartridges.
  2. Chlor Alkali Products division (72% of 2008 sales and 91% of profits) - manufactures chlorine and caustic soda, hydrochloric acid, hydrogen, sodium hydrosulfite, potassium hydroxide and bleach products.

OLN is the biggest North American manufacturer of industrial bleach, and the 3rd largest domestic chlor-alkali producer.

Olin has maintained a very strong balance sheet:

  • Current Assets/Liabilities Ratio: 1.91
  • Long Term Debt/Equity Ratio: .33

Within its Diversified Chemicals peer group, it has the highest dividend yield, ( 5.8 %+), the second highest Return on Revenue, (8.9).

Olin's 3/31/09 Net Income increased by more than 25% over the same period in 2008 , while its revenue was flat.

The 2009 fiscal year earnings consensus forecast is $1.47. With its 1st quarter earnings of $.60, Olin has already earned over 40% of the projected amount.

OLN is scheduled to report 2nd quarter earnings on Tuesday, July 28th, and the consensus earnings figure is $.33/share, down significantly from $.47/share a year ago.

Analysts are predicting a negative production year in 2009 for the diversified chemicals industry, as the depressed housing and automotive markets will probably continue to dampen demand.

That being said, Olin's Winchester division should post record profits in 2009, as a result of increased military and commercial demand, and lower metal costs. In addition, Olin's chemical shipments for the balance of 2009, although lower vs. 2008, should have a seasonal boost over 2009 first quarter, which was also hampered by planned plant maintenance and downtime.

Yesterday, Olin declared its 331st consecutive quarterly dividend (that's over 82 years), a payout of $.20/share.

With a Dividend Payout Ratio is only approximately 33%, the dividends appear secure.

With OLN trading at around $13.72 this morning and about to report earnings within a few days, here are 2 possible scenarios, depending upon your outlook. (Both are based upon 100 shares of OLN):

Scenario 1: Moderately Bullish - Sell Covered Calls

Investment Time Period: 211 days, Expiration date: Feb. 20, 2010

Buy 100 shares @ $13.72

Sell a Feb 2010 $15.00 call, (OLNBC), for $1.15: an 8.4% nominal yield

Collect $.60/share in dividends: a 4.37% nominal yield

If your shares remain "static", i.e., they don't rise above or to $16.75, the combined value of the call strike price, ($15.00), plus the call premium, ($1.15), you'll keep your shares, and have a lower cost basis of $12.07.

Total Static Yield: $1.75/share, a 12.77% nominal yield in 211 days, (22.1% annualized).

Breakeven: $11.97 : ($13.72 cost less $1.75 in dividend and call revenue)

Also, if OLN does rise to or past $16.75 around expiration time, your shares will be assigned/sold at the $15.00/share strike price, netting you the additional "assigned profit" of $1.28/share, ($15.00 strike price less the $13.72 original cost basis).

Assigned Yield: 9.33%

Olin Covered Call Trade Breakdown
Price/share Dividends per share Dividend Yield Call Bid Premium Total Static Yield Potential Assigned Yield Total Potential Yield
$13.72 $.60 4.37% $1.15 12.8% 9.33% 22.13%
Annualized Yields 7.6% 22.14% 16.14% 38.3%
Click to enlarge

Scenario 2: Mildly Bullish - Defensive

If you're skeptical about the market, or wary of a pullback, a more conservative way to profit from OLN would be to sell puts against it. in this scenario, investors normally assess the price level that they'd be comfortable owning a stock, and then try to get close to it by selling puts at a strike price near this level.

For example, if you were comfortable owning OLN at around $11.50, a price level that would give you a 7% dividend yield, you could do the following put selling trade.

Brokers usually require a cash reserve that's equal to up to 100% of the underlying share's value. The % cash reserve required varies by broker. For this example, we'll assume a 100% cash reserve. One option contract normally corresponds to 100 shares of the underlying stock:

Sell the NOV $12.50 put (OLNVW), which is currently worth $1.05.

Time Period: 120 days Expiration date: 11/21/09

There are 2 possible outcomes:

Outcome 1: If OLN declines to or past $11.45 at or near the expiration date, you'll be assigned/sold shares at $12.50.

However, your net cost would be $11.45 (the $12.50 strike price less the $1.05 put premium).

Olin's 10-year low is $8.97, which it hit in early March, 2009.

You'd receive 100 shares for each put contract you sold.

Put Yield: 8.4% (25%+ annualized)

Outcome 2:

If OLN doesn't decline to or past $11.45 at or near the expiration date, your cash reserve will be released.

Put Yield: 8.4% ($105.00/put contract) 25%+ annualized

An additional benefit of selling calls and puts is that this option revenue is paid into your account within 3 days of the trade.

It may interest you that famed value investor Warren Buffet happens to a big believer in selling puts, having recently sold over $5 billion worth of them in private deals.

Disclosure: Author is long shares of Olin.